How to pay traders in information markets: results form a field experiment

The results of recent studies on prediction markets are encouraging. Prior experience demonstrates that markets with different incentive schemes predicted uncertain future events at a remarkable accuracy. In this paper, we study the impact of different monetary incentives on prediction accuracy in a field experiment. In order to do so, we compare three groups of traders, corresponding to three treatments with different payment schemes, in a prediction market for the FIFA World Cup 2006. Somewhat surprisingly, our results show that performance-related payment schemes do not necessarily increase the prediction accuracy. Due to the risk aversion of traders the competetive environment in a rank-order tournament leads to the best results in terms of prediction accuracy.